1. CHAPTER 20
ELASTICITY

2. Elasticity
Sensitivity of one thing to a change in something else

3. Law of Demand
There is an inverse relationship between changes in price and changes in quantity demanded.

4. Price Elasticity of Demand
The sensitivity of quantity demanded to a change in price. If quantity demanded is sensitive to a change in price, we say demand is relatively elastic. If quantity demanded is not very sensitive to a change in price, we say demand is relatively inelastic

5. A Tale of Two Businesses (selling different products)Q
T.R. 10
100 11 95 P Q
T.R. 10
100 11 50

6. Determinants of Price Elasticity of Demand
Number of Substitutes
Time Period
Importance to Budget
Necessity vs. luxury

7. Basic Formula

8. Types of PE of D
PE of D > 1 = Elastic PE of D < 1 = Inelastic PE of D = 1 = Unit Elastic Perfectly Inelastic Perfectly Elastic

9. Complications??
PE of D changes in ranges along a downward sloping demand curve. The direction of the calculation changes the PE of D coefficient.

10. Using PE of D to Predict Total Revenue Changes
Where Demand is Inelastic
When Demand is Elastic
Increase in P …. Increase in TR Decrease in P …..Decrease in TR
Increase in P ….. Decrease in TR Decrease in P ……. Increase in TR

11. Price Discrimination
Charging different groups of customers different prices based upon the group's price elasticity of demand Must be able to separate the groups Must be able to prevent them from reselling amongst each other

12. Income Elasticity of Demand
Formula Positive = Normal Good Negative = Inferior Good Example
Income
Widget Consumption
$50,000
100,000
$60,000
60,000

13. Cross Price Elasticity
Formula Positive = Substitutes Negative = Complements Example:
Price of Peanut Butter
Ave. Consumption of Jelly
$4.00 per Jar 10
$5.00 per Jar 6

14. Price Elasticity of Supply
Formula
Determinants
Example:
Calculate the price elasticity of supply using the midpoint
Price of Peanut Butter
Quantity Supplied
$5.00 per Jar
100
$10.00 per Jar
110